Grove v. Beaver

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
JOHN DRYDEN BEAVER; and
SUSAN J. BEAVER,
Debtors. Case No. 7-10-11028 SS
TED GROVE,
Plaintiff,
v. Adversary No. 10-01050 S
JOHN DRYDEN BEAVER,
Defendant.
MEMORANDUM OPINION IN SUPPORT OF ORDER
GRANTING IN PART AND DENYING IN PART
DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
Plaintiff Ted Grove (“Grove” or “Plaintiff”) seeks a
nondischargeability judgment against Debtor John Dryden Beaver
(“Beaver” or “Defendant”) arising out of Beaver’s defective
construction of Grove’s house based on §§523(a)(2), (a)(4) and
(a)(6). Defendant has moved for summary judgment on the claims.
The Court grants summary judgment on the §523(a)(4) claim and
denies it on the §§523(a)(2) and (a)(6) claims.1
Procedural Background
On December 14, 2006, Grove sued Beaver in state court and
obtained a default judgment on November 19, 2009 which is now
final and non-appealable (doc 2, ¶ 8-9). On March 3, 2010,
The Court has subject matter and personal jurisdiction	1
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(I); and these
are findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
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Defendant filed a Chapter 7 bankruptcy petition. In response,
Plaintiff initiated this adversary proceeding to prevent
Defendant from discharging the judgment debt. Plaintiff moved
for summary judgment on June 30, 2010, asserting that the state
court’s findings were entitled to collateral estoppel. That
motion was denied since default judgments do not have preclusive
effect in the State of New Mexico (doc 16). Defendant has now	2
filed this Motion for Summary Judgment (doc 24), to which
Plaintiff has filed a Response (doc 30).
Summary Judgment Standard
Summary judgment is warranted when “there is no genuine
issue as to any material fact and that the movant is entitled to
judgment as a matter of law.” Bankruptcy Rule 7056(c). The
moving party must establish that there are no disputed material
facts and that they are entitled to judgment as a matter of law.
In order to defeat such a motion, nonmovant must “go beyond the
pleadings and by her own affidavits, or by the depositions,
answers to interrogatories, and admissions on file, designate
specific facts showing that there is a genuine issue for trial.”
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)(internal
citations omitted). The Court must view the facts in the light
See, for example, Blea v. Sandoval, 107 N.M. 554, 558,	2
761 P.2d 432, 436 (Ct. App.), cert. denied, 107 N.M. 413, 759
P.2d 200 (1988) (“In New Mexico, we recognize that default
judgments do not have collateral estoppel effect in future
litigation, although they may have res judicata effect.”).
2
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most favorable to the party opposing summary judgment.3
Factual Background
At the heart of this case is the construction of a dream
home gone horribly wrong by one account (Plaintiff’s) or a home
with some moderate shortcomings by another account (Defendant’s).4
While the evidence strongly suggests that Plaintiff is the party
who has more accurately assessed the status of the home, the
issue for the Court is, at this stage, merely the question of
liability.
Harris v. Beneficial Oklahoma, Inc. (In re Harris), 209	3
B.R. 990, 995 (10th Cir. BAP 1997)(“When applying this standard,
we are instructed to ‘examine the factual record and reasonable
inferences therefrom in the light most favorable to the party
opposing summary judgment.’ ”) Wolf v. Prudential Ins. Co. of
America,50 F.3d 793, 796 (quoting Applied Genetics Int'l, Inc. v.
First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990))
(internal quotation marks omitted); Henderson v. Inter–Chem Coal
Co., 41 F.3d 567, 569 (10th Cir.1994)(stating that the court must
“view all facts and any reasonable inferences that might be drawn
from them in the light most favorable to the nonmoving party
...”).
“The picture one gleans from the Amended Complaint is that	4
of a dissatisfied customer who wants more hot water and a
straighter wall.” Defendant’s Motion for Summary Judgment, at 7
(doc 24). Plaintiff’s allegations, based in part on an analysis
by a professional engineer, include an unstable load-bearing
retaining wall in the basement, a failure to join the concrete
floor to the stem wall resulting in “the floor [being] free-
floating in relation to the house and [cracking] significantly”,
improper waterproof membrane installed on the below-surface
exterior walls, solar hearing system that leaks, heated water
reservoir that was modified by Defendant so that it fails to
provide sufficient hot water, and several citations by the New
Mexico Construction Industries Division for building code
violations, failure to call for inspections, etc. Affidavit of
Ted Grove, at 2-5 (docs 30-2 and 30-3).
3
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According to Defendant’s Affidavit, Beaver contracted to
build Ted Grove a home during 2004-05 (doc 24, ex. 2).
However, according to Plaintiff, things quickly began to turn for
the worse. Grove alleges that Beaver “failed to comply with
applicable building codes, manufacturer’s specification and the
plans for the job”, “began construction of the garage without a
permit,” “failed to comply with NM CID inspector’s instructions
to remedy various building code violations,” and then “abandoned
the job” despite “owner’s repeated requests to complete the job,”
(doc 24, pp. 3-4). Grove contends that Beaver’s debts over the
botched construction job are non-dischargeable in bankruptcy on
account of Beaver’s allegedly fraudulent behavior (doc 2, pp. 3-
4). Beaver argues that the debt is dischargeable, urging that
although Grove is not have been happy with the result, Beaver
used his “best efforts,” “never attempted to cause [Grove] or his
property any injury,” and “never said anything false to
Plaintiff,” (doc 24, ex. 2, ¶ 9-10, 12). Furthermore, Defendant
asserts that he never acted in a fiduciary capacity for Grove
(doc 24, ¶ 4-7).
Disputed Facts
Defendant sets out seven material undisputed facts, only the
last two of which are disputed. Defendant’s fact #6 recites that
Defendant has never made any false statements to Plaintiff (doc
30, p. 3). Fact #7 states that “Defendant did not have any
4
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intent to harm Plaintiff at any time” (doc 24, p. 2).
Plaintiff’s general objections are responsive to both disputed
facts (doc 30, pp. 4-5). Plaintiff relies on his affidavit which
disputes Beaver’s capability, at the time of the contract, to
build a hot water heater (doc 30, ex. 2, p. 2). Plaintiff also
cites to the affidavit and asserts that the solar heating system
did not work, the waterproof membrane was not suitable, the floor
has cracked due to defects in construction, and Beaver abandoned
the job without warning (doc 30, ex. 2 , p. 3; doc 30, ex. 2, pp.	5
1-2). Plaintiff has provided further evidence that the house, as
constructed, was not in accordance with applicable building codes
(doc 30, ex. 2, p. 3; doc 30, ex. 4-13). The facts cited in the
affidavit demonstrate that there are genuine issues of fact as to
whether Defendant ever made a false statement to or intended to
harm Plaintiff.
Nondischargability under 523(a)(4)
Plaintiff brings a claim for nondischargability under 11
U.S.C. §523(a)(4), which provides for the nondischargability of
any debt “for fraud or defalcation while acting in a fiduciary
capacity, embezzlement or larceny.” 11 U.S.C. §523(a)(4).
Plaintiff’s apparent primary basis for this complaint is that
“Beaver received funds from Grove in a fiduciary capacity and
thereafter committed fraud and defalcation which caused Grove to
The Affidavit is split into exhibits 2 and 3.	5
5
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sustain a loss,” (doc 2, ¶ 13). However, Plaintiff does not
controvert, and therefore admits that Defendant was paid only
upon completion of specific phases of work and never received any
advances (doc 24, ¶ 3; doc 30).
“The existence of the fiduciary relationship is a threshold
issue to be determined under §523(a)(4).” In re Merrill, 246
B.R. 906, 921 (Bankr. N.D.Okla. 2000)(citing Antlers Roof-Truss
and Builders Supply v. Storie (In re Storie) 216 B.R. 283, 286
(10 Cir. BAP 1996). In order for the Court to find the	th
existence of a fiduciary relationship under §523(a)(4), money or
property must have been placed in the custody of the debtor. See
Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10 Cir.	th
1996). Plaintiff asserts that Allen v. Romero (In re Romero),
535 F.2d 618 (10 Cir. 1976) establishes a fiduciary duty between	th
all licensed contractors and their clients (doc 30, p. 10) such
that any action that would justify revocation of a license
constitutes the basis for not discharging a debt arising from
such action. It does not. As the Bankruptcy Court for the
District of Colorado correctly explained, Romero only established
a fiduciary duty on the part of licensed contractors “with regard
to funds advanced by the owner for payment of subcontractors and
suppliers.” Cundy v. Woods (In re Woods), 284 B.R. 282, 288
(Bankr. D.Colo. 2001); Horejs v. Steele (In re Steele), 292 B.R.
422, 428, 429 (Bankr. D.Colo. 2003). Romero itself is clear that
6
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its factual predicate was the advance of funds: “[the
Construction Industries Licensing Act] clearly imposes a
fiduciary duty upon contractors who have been advanced money
pursuant to construction contracts.” Id. at 621. Since
Plaintiff has constructively admitted that there were no such
advances, Plaintiff’s claim under §523(a)(4) fails as a matter of
law on that basis.
Plaintiff also cites to the part of the Construction
Industries Licensing Act (“CILA”) that specifies the grounds for
revoking a license. NMSA §§60-13-23. These grounds, other than
subsection (F), appear to not involve any transfers of funds. It	6
is not immediately apparent that the behavior specified in the
cited subsections of the statute are related to any fiduciary
duty that a contractor might ordinarily have, or specify
instances of conduct that are clearly dischargeable without a
further showing of fraud or malicious or wilful intent. For
example,(A) (“If a licensee ... by reason of incompetence
violates any provision of [CILA] ....”); (E) (“Unjustified
abandonment of any contract....”); and (G) (“Departure from ...
plans or specifications ....”). Nevertheless, Plaintiff has not
briefed this specific issue at all (nor has Defendant) and
Subsection (F) carries forward the statutory provision	6
upon which In re Romero is based: “conversion of funds or
property received for prosecution of completion of a specific
contract or for a specified purpose in the prosecution or
completion of any contract, obligation or purpose....”
7
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therefore the Court does not rule on this part of the §523(a)(4)
claim. If Plaintiff wishes to pursue this theory of
nondischargeable liability, he must brief the issue.
For the foregoing reasons, the Court will grant summary
judgment on the §523(a)(4) count.
Nondischargability under §523(a)(6)
Plaintiff also claims nondischargability under §523(a)(6),
which provides for nondischargability of debts “for willful and
malicious injury by the debtor to another entity or to the
property of another entity.” 11 U.S.C. §523(a)(6). Plaintiff’s
complaint in this respect is deficient:
14. With respect to liability under Section 523(a)(6),
the Findings and Conclusions, as well as the Judgment,
establish that Beaver caused a deliberate and
intentional injury to Grove and his property. See
Kawaauhau v. Geiger, 523 U.S. 57 (1998).
Doc 2, at 4-5. The “Finding of Facts and Conclusions of Law”
issued by the State Court recite that “Defendant’s wrongful
conduct in this case was tortuous [probably true but also
tortious], intentional, reckless, willful, wanton, negligent and
in bad faith.” Doc 2-3 at 8 (Finding 48). Thus the complaint,
even taken together with the exhibit, strictly speaking fails to
state a cause of action because it fails to simply recite that
the behavior in question was “wilful and malicious”. And in
Response to the Motion for Summary Judgment, Plaintiff
incorrectly argues that “debt resulting from willful or malicious
8
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injury by the debtor to another entity or the property of another
entity is not dischargeable,” (doc 30, p. 12)(emphasis added).
On the contrary, the conduct in question must be both willful and
malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129
(10 Cir. 2004). At the same time, Defendant has argued the	th
sufficiency of the §523(a)(6) count on the “merits” of a summary
judgment standard and not from the viewpoint of a sufficiency of
the pleadings. The Court will therefore assume for purposes of	7
the summary judgment motion and for trial that the Amended
Complaint has been further amended to assert a standard of
“willful and malicious”, unless Defendant files a motion
specifically asking that Plaintiff be required to amend the
amended complaint.
Given that posture (that is, assuming that Plaintiff had
stated and argued the correct standard), Plaintiff’s §523(a)(6)
claim survives this summary judgment motion. While it seems
quite unlikely, one could perhaps imagine a situation in which
Beaver took on the project knowing that he was incapable of
The Court is not at all faulting Defendant’s counsel for	7
not moving for a dismissal of the §523(a)(6) count on the grounds
of insufficient pleading. The Court assumes that Defendant’s
counsel thought that Plaintiff could so easily amend that count
that it was not worth the expenditure of resources to formally
pursue it. The result then of this discussion is that the
parties, and particularly Plaintiff’s counsel, will presumably
use the correct standard going forward. Should Defendant’s
counsel disagree with this disposition, he is of course welcome
to move this Court to change its ruling.
9
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performing competently and therefore knowing (and in effect
intending) that he would harm Grove’s property.8
Having made the foregoing ruling, the Court need not specify
now with more precision what are the limits of liability of
§523(a)(6) liability. For example, relying on In re Campos, 768	9
F.2d 1155, 1158(10th Cir. 1985) (rejecting a “reckless disregard”
standard and defining “wilful” to mean deliberate or
intentional), the Honorable Mark B. McFeeley stated that
[f]inding that the debt at issue is non-dischargeable
based on an inference that the Defendant knew or should
have known that his reckless driving would result in
injury inappropriately expands the scope of
nondischargeability under 11 U.S.C. § 523(a)(6) to
include acts of negligence under an objective,
reasonable person standard.
Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 546 (Bankr. D.N.M.
2009). However, in that same decision Judge McFeeley used a
standard which was whether “Defendant knew the harm to Plaintiff
was substantially certain to occur”. Id. Such a standard
clearly goes beyond negligence and even recklessness. “[D]ebts
arising from recklessly or negligently inflicted injuries do not
fall within the compass of § 523(a)(6).” Kawaauhau v. Geiger,
At any trial, the Court’s decision will be governed in	8
part by the standard that doubt is to be resolved in Defendant’s
favor. Bellco First Federal Credit Union v. Kaspar (In re
Kaspar), 125 F.3d 1358, 1361 (10 Cir. 1997).	th
The Court raises the issue now simply to put the parties	9
on notice that where to draw the lines for non-dischargeability
in this instance may not be easy to determine.
10
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523 U.S. 57, 64 (1998). In consequence, it is possible that
Beaver knew that given his abilities or lack thereof, he was
substantially certain to harm Grove’s property. The Court cannot
make that determination on the record as it now exists.
Elements of Nondischargability under §523(a)(2)(A)
Plaintiff also brings a claim for nondischargability under
11 U.S.C. §523(a)(2)(A), which prevents funds obtained through
common-law torts, such as fraud, from being discharged through
bankruptcy. Field v. Mans, 516 U.S. 59, 69 (1995). The relevant
portion of the Code reads as follows:
(a) A discharge under section 727, 1141, 1228(a),
1228(b), or 1328(b) of this title does not discharge an
individual debtor from any debt ...(2) for money,
property, services, or an extension, renewal, or
refinancing of credit, to the extent obtained by — (A)
false pretenses, a false representation, or actual
fraud, other than a statement respecting the debtor’s
or an insider’s financial condition;
11 U.S.C. 523(a)(2)(A). As this Court (the Honorable Mark B.
McFeeley) detailed in Lazaron v. Lucas (In re Lucas), 386 B.R.
332 (Bankr. D.N.M. 2008), a Plaintiff must prove the following
elements to succeed in a claim under 523(a)(2)(A):
1) The debtor made a false representation;
2) the debtor made that representation with the intent to
deceive the creditor;
3) the creditor relied on the representation;
4) the creditor's reliance was justified; and
5) the creditor was damaged as a result of that reliance.
11
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Id. at 337-38. With respect to this cause of action, Plaintiff’s
complaint alleges all of the requisite elements (doc 2). Read	10
favorably, Plaintiff alleges five counts of misrepresentation:
1) Beaver asserted that he was capable of building the house
in accordance with the plans (doc 30, p. 5);
2) Beaver asserted he “would do a workmanlike job” (doc 30,
p. 5);
3) Beaver “assured the Plaintiff that he could design and
install a solar heating system that would be as good as the
Plaintiff’s first choice” (doc 30, p. 7);
4) Beaver promised Plaintiff that he would build a “good
house” (doc 30, p. 3); and
5) Beaver promised Plaintiff that he would accompany him on
a walk-through of the house and correct anything that was not to
Plaintiff’s satisfaction.
Plaintiff puts forward a compelling argument that Defendant
did not build a proper house, but this is not the same as an
argument that Defendant could not have done so, nor that
Defendant honestly, or even negligently, believed at the time he
made the representations that he would do so. In essence, what
Plaintiff seeks is a factual determination that Defendant, at the
Plaintiff alleges that he “reasonably relied” on Beaver’s	10
alleged misrepresentations. While this is no longer the correct
standard after Field v. Mans, the justifiable reliance standard
is less burdensome than the reasonable reliance standard alleged
here. Field v. Mans, 516 U.S. 59 (1995).
12
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time the representations were made, knew he could not or would
not perform as represented. See Yunkers v. Whitcraft 57 N.M.
642, 261 P.2d 829 (1953) (fraud not shown when evidence did not
establish that defendants did not intend to perform in the future
as promised). While it seems unlikely that Plaintiff will be
able to prove the second element of fraud, intent to deceive, the
Court cannot say as a matter of law that Plaintiff will be unable
to prove it, particularly given what Plaintiff alleges is a
catalog of such major construction defects.
Rarely is it appropriate to grant summary judgment on a
claim for non-dischargeability based on 11 U.S.C.
§523(a)(2)(A) because [the determination of whether
there was an] intent to defraud often depends the
credibility of the witness.
In re Lucas, 386 B.R. at 338. The Court therefore cannot grant
summary judgment on the §523(a)(2)(A) count.
Conclusion
For the foregoing reasons, the Court finds that Defendant is
not entitled to summary judgment under 11 U.S.C. §523(a)(2)(A) or
§523(a)(6) but that Plaintiff’s claim under §523(a)(4) fails.
Plaintiff’s claims under §523(a)(2)(A) and §523(a)(6) survive
because Plaintiff cited specific statements in the affidavit of
Ted Grove that demonstrate material issues of fact as to
Defendant’s intent. Defendant’s Motion for Summary Judgment will
be GRANTED with respect to Plaintiff’s claim under §523(a)(4) and
DENIED with respect to Plaintiff’s claims under §523(a)(2)(A) and
13
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§523(a)(6). The Court will also set a status conference to set
discovery deadlines or a trial date as needed. An order
consistent with this opinion will enter.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: August 8, 2011
COPY TO:
John E Farrow
PO Box 35400
Albuquerque, NM 87176-5400
Michael K Daniels
PO Box 1640
Albuquerque, NM 87103-1640
14
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